It is a Great Time to Build, if Your Glass is Half Full?
By Mike Weidner

National economic indicators continue to report a very slow recovery for the recession. Even though some of the indicators and even the national news media portray a discouraging future, it still remains a great time to build. Many of the indicators we use to monitor current conditions in the construction industry are providing an encouraging outlook for owners and developers looking to build. It just depends on whether your glass is half full or half empty. However, in these economically trying times owners need to proceed carefully with a well qualified and trusted team to ensure their economic and quality goals can be met.

Some of the positive indicators for recovery of the construction industry can be found in the Architecture Billings Index, construction materials costs, and the Construction Backlog Indicator. According to Kermit Baker, Chief Economist for the American Institute of Architects (AIA), the architectural community is beginning to see hopeful signs emerging from   February’s Architecture Billings Index (ABI). The ABI “moved up more than two points to a reading of 44.8,” said Baker.

The Architecture Billings Index is derived from a monthly “Work-on-the-Boards” survey and produced by the AIA Economics & Market Research Group. The findings from the survey produce a leading economic indicator that provides an approximately nine to twelve month glimpse into the future of nonresidential construction activity.

Baker goes on to say, “Two industries that recently have recovered slowly from economic downturns are basic manufacturing and automotive sales. This time, they are showing signs of a healthy rebound. The U.S. index of industrial production has increased for nine straight months, and over this period manufacturing activity has increased by 5%. Auto and light truck sales have been above year-ago levels for five straight months and so far in 2010 sales are running about 10% above 2009 levels.”

Architects have seen only minor   benefits from the federal stimulus program, since the program did not focus on commercial and industrial sectors. However, the largest benefit of the program went to architects working on federal buildings, assisting housing modernization, energy/weatherization improvements, schools, and local government buildings like fire stations, libraries and justice facilities.

With the help of moderate increases in light   manufacturing, automotive sales, and federal stimulus related projects, the ABI is showing modest signs of improvement. However, it still remains at record lows. And while the low ABI appears to be  troubling to  many contractors who rely heavily on hard bid projects, it in turn can be encouraging to owners or developers thinking about beginning their next project. The architectural firms that have the wherewithal  to weather the storm are poised and  ready  to  jump on board and give you their full attention.

Similar to the Architecture Billings Index, the Associated Builders and Contractors (ABC) monitor the backlog of work of  construction firms.  ABC  reported on March 24, 2010 that its Construction Backlog Indicator (CBI) sharply declined nationally by 9 percent between November 2009 and January 2010. In the Northeast Region, the backlog retreated by 1.04 months from January 2009 to January 2010 to a current average backlog of 4.88 months. The CBI is a forward-looking indicator that measures the amount of construction work under contract to be completed in the future.

According to ABC Chief Economist Anirban Basu, “Nonresidential construction tends to lag the overall economy by 12 to 24 months. With the broader economy having been in a slow recovery for roughly three quarters, and with the stimulus package still having an impact, the hope had been that some signs of backlog stability would be apparent by now. However, all indications continue to point toward an ongoing decline in the commercial and industrial construction industry.”

With the CBI at its lowest level in 15 months and with competition for projects at its most intense level in recent memory, these factors should be encouraging to prospective developers.

The best news of all recently has been the steady materials price indexes. While paving asphalt  prices have  begun the typical springtime increase towards a late summer peak, cement,  lumber and  gypsum product prices have remained steady. Engineering  News  Record’s (ENR) average price for lumber is still 5.3% below last  year’s average. While, mill prices have grown slightly from January to February they are still 26% below February 2005’s  peak level. Portland cement has only increased 0.2% in April,  Ready-Mix concrete had virtually no gain since a 1.5% decline in March, and Concrete Block has held steady following February’s 1.3% decline. All together, ENR’s Materials Cost Index for April has risen just slightly by 0.3%.

Other encouraging news from ENR includes the annual inflation measured by the Construction Cost Index increased slightly from 1.6% in March to 1.7% in April. The slight rise in material costs has increased the Building Cost Index, which takes  into  account  material  and  labor costs, this month by a minuscule 0.1%.

While there appears to be some glimmers of hope indicated by the above mentioned indicators, the design and construction industries across the country are still experiencing unprecedented levels of competition. Owners need to proceed carefully with their next project accompanied by a well qualified and trusted team to ensure their economic and quality goals can be met.

So what exactly determines the cost of a project?  This is determined by three simple factors:

• Plan of the property from which you will be building
• Type of materials being used to construct the plan
• Number of people required to build the project in the allotted time frame

To  help  control  the  costs  associated  with  each  of  these  items  a  cost  management service can be effectively used with  the  correct planning. This service will overlook the design and provide advice to change products that have been specified but in reality are not necessary to meet the owner’s  requirements. At the same time you may be able to cut costs to the overall budget. By picking out these items throughout the project documents, bids can be delivered with accurate costs associated with the allotted time on the project schedule. In summary, the overall goal of the service is to ensure that the project stays within the budget limits as well as meets quality and performance targets. 

Along with the cost management service, the estimating department must be able to record all of the changes to the original documents due to issued addendums, request for information and any other modifications. With the ongoing advancements our country has made with technology, companies are now able to use software to assist them in  recording  this  information. Software  such  as  PlanWell BidCaster, Meridian Systems, Digital Canal,  Plan  Swift, etc. are used as a way to document solicited contractors for  the project, post drawings, upload addendums issued and distribute request for information responses from the project architect.  By documenting the number of  contractors  bidding the project it  allows  the  company  to evaluate where additional bids will be needed according to the division. Every trade of construction has a description in which they are associated under one of the 22 divisions currently used. In reviewing contractors  that  are bidding by division, the  estimator can reach out to additional contractors  for  quotes to help fine tune a bid.  While   miscellaneous items still remain to include in your bid such as insurances, permits, professional fees and financing fees, new software can help a company be very successful  in an ever challenging construction industry.

Advancements   in   the   use   of  technology in the construction industry remained at a stand-still for a significant number of years.  Since the large advancements made at the start of the new millennium, the capabilities of construction have been able to advance significantly. Of   the   new  pieces  of technology,   three-dimensional     programming has allowed contractors, owners  and architects to visually examine a project  for  design flaws or possible issues that may arise before ground is broken.  Examples of this program are Aladdin4D, Blender and 3ds Max. This technology helps to eliminate the possibility of  budget breaking change orders at the end of the project.

In  this era where low price  prevails, owners need to beware of awarding rock bottom low bids, as  this opens  their exposure to additional  risk  through poor quality of construction and increased  costs from change  orders. This appears to be an ideal time to employ the Design-Build project delivery method. Selecting a qualified  team of  an architect and contractor will provide owners with the best value for their next project; not to mention save them time and money. Many owners have found it takes too long and costs too much to produce buildings using the traditional design-bid-build approach. More and more owners are migrating toward an integrated team approach to design and construction called Design-Build. The idea of utilizing a Master Builder has been around as long as humans have been building structures.

This time-tested approach unites the owner, architect, and engineers with the contractor and subcontractors from the very  onset  of  the project. From day one the design-build team  is working together in the owner’s  interest. The owner is assured of  a  single  source of  responsibility to lead the team. About 85% of your project budget will be used for “bricks and  mortar” so  it’s no surprise that 95% of all  design-build  projects across  the country  are contractor led. By creating this integrated team at the beginning of the project, constant communication within the team results in higher quality, less costly projects that are completed in a shorter time frame with the end product meeting the owner's expectations.

The design-build project delivery method can offer the owner distinct advantages over the traditional design-bid-build process, such as;

• Single Point Responsibility
• Maximizes Contractor & Architect Input
• Integrated Team Approach Essential  To “Green” Design And Construction
• Continuous Budget Management
• A Guaranteed Maximum Price (GMP) Determined Early In The Project
• Architectural and Contractor Fees Kept To A Minimum
• Legal Fees Reduced By Eliminating Adversarial Roles
• Realistic Project Scheduling
• Costly Change Orders Are Virtually Eliminated
• Costs Provided In A Competitive Environment
• Ability To "Fast Track" Projects
• Continuous Interactive Communication

Additional  benefits  of   the design-build aspect are the enhanced communication,  increased accountability by the service provider,  the    single  source   project   delivery   and a  value   based  project   feedback  system.  Enhanced   communication allows the owner to have unlimited access to the design and  project team as well as balancing the construction  approach and   project budget more efficiently.  As with any project, communication is the critical factor in effectively  managing the project as well as reporting to the owner on  a daily basis. Increased  accountability from the  service provider helps the owner eliminate the middle man as it relates to communication. This allows a degree of flexibility for  the owner as it eliminates the traditional project with multiple contractor  contacts  and  simplifies  it  to a single source contact on the project.
Project   feedback   from   the  design  professionals  will  help  the  owner   better  manage the cost of  materials they are  using in the project while at  the same  time allow the design professional to provide recommendations for getting “more bang for your buck”.    

The economy is starting to   slowly  show   incremental   signs  of improvement and regardless of national perception, this is still a great time to build. Monitoring important cost indexes will certainly help keep a competitive edge. But now more than ever, owners  need  a trusted construction partner to help them through the process. An integrated/partnered relationship between Architects and Contractors will ensure their quality and financial goals are met while delivering the final project in a shorter time frame.

Is your glass half full?

About the Author:

Mike Weidner is the Regional Vice President of the Carlisle office for Poole Anderson Construction and is responsible  for  overseeing  the  planning,  design, preconstruction and construction services on Poole Anderson projects. Mike has more than 23 years experience in the construction industry and is a proven leader in construction. Poole Anderson Construction has office in both State College and Carlisle.